- Investing in the commodities asset class
We all rely on products, substances, and materials that are either mined or grown for our everyday convenience. These resources form the foundation of the commodities asset class – an important component of a diversified investment portfolio. In this article, we explore why including commodities in your investment strategy can be beneficial.
What Makes an Investment a Recognized Asset Class?
There are key criteria to be met for an investment opportunity to be recognized as an asset class. The investment must provide:
- Long-Term Returns. The investment should earn a rate of return above the risk-free rate over the long term.
- Low Correlation with Other Assets. It should exhibit low to negative correlations with other asset classes.
- Unique Returns. The returns should be unable to be replicated by linear combinations of other asset classes.
Why Commodities Qualify as an Asset Class?
According to an Information Paper published by H3 Global Advisors Pty Ltd in October 2009, commodities meet these criteria. That paper affirmed commodities as a distinct asset class. Here are some of the key features that make commodities a valuable addition to an investment portfolio:
- Attractive Long-Term Returns. Over time, commodity futures have offered returns comparable to those of global equities.
- Portfolio Diversification. Commodity futures provide diversification benefits due to their low to negative correlation with stocks and bonds.
- Optimal Portfolio Weighting. Historical mean-variance portfolio optimizations suggest that the optimal weighting of commodity futures in portfolios ranges between 5% and 36%. The optimal long-term weighting is between 0% and 26%.
Is Investing in Commodities Right for You?
Clients will be familiar with our annual portfolio review process. During that process we assess the benefits of the commodities asset class allocation in meeting your strategic investment goals. This decision takes into account your individual risk profile and the correlation between commodities and other assets in your portfolio.
ContinuumFP: Helping You Build a Balanced Portfolio
Our experienced advisers are available to recommend an investment portfolio aligning with your personal goals and financial objectives. To schedule a meeting with one of our advisers, use our convenient Book A Meeting facility to make an appointment. Alternatively, call our office, at (07) 34213456. Our team offers a no-obligation, no-cost initial consultation working to our mantra that:
- we listen to your investment goals,
- we understand your financial needs, and
- we provide you with tailored wealth management solutions.
(This article was originally posted in February 2010. We occasionally refresh/ update it, most recently update in August 2024.)
